Two decades after the end of central planning, we investigate the extent to which the advantages bequeathed by planning in terms of high investment in physical infrastructure and human capital compensated for the costs in allocative inefficiency and weak incentives for innovation. We assemble and analyse three separate types of evidence. First, we find that countries that were initially relatively poor prior to planning benefited more, as measured by long-run GDP per capita levels, from infrastructure and human capital than they suffered from weak market incentives. For initially relatively rich countries the opposite is true. Second, using various measures of physical stocks of infrastructure and human capital we show that at the end of planning, formerly planned countries had substantially different endowments from their contemporaneous market economy counterparts. However, these differences were much more important for poor than for rich countries. Finally, we use firm-level data to measure the cost of a wide range of constraints on firm performance, and we show that after more than a decade of transition in 2002-05, poor ex-planned economies differ much more from their market counterparts, in respect to both good and bad aspects of the planning legacy, than do relatively rich ones. However, the persistent beneficial legacy effects disappeared under the pressure of strong growth in the formerly planned economies in the run-up to the global financial crisis.

This paper is a very good place to start for trying to seriously figure out what communism did and did not do. It accounts for the relatively disastrous performance of East relative to West Germany, while helping to explain why Russia is in some regards a better place to live than Mexico. It is also a very strong testament to the extreme importance of human capital and good formal education.

They also cite a recent Broadberry and Klein piece, “When and Why did Eastern European Economies Begin to Fail?, Lessons from a Czechoslovak/UK Productivity Comparison, 1921-1991,” available in an earlier form here (pdf); in this case I worry more about the quality of the statistics, plus legacy effects can sustain a formerly successful economy for some while.

I believe this paper does not discuss the role of the internal passport system because it affects the livability of the major Russian cities. Mexico City would seem dramatically more “liveable” if the lower classes were simply kept away by residence laws. Of course, that’s not the same thing as saying the average Mexican would be helped by that.

Sorry, tangent here, but I thought the perspective from Turkmenistan, where I lived 2004-2006, might be relevant.

On paper the country is medium income, due to the oil and gas, but that money is stolen by the administration and others. So it is actually a very poor nation. The legacy of the Soviet system there was, as Tyler mentions, an educated populace, though they are doing their best to end undermine learning and the education system has been pretty much decimated already. Anyone who wants a real education must head abroad, and they usually do not return. Second, almost all of the non-oil industrial capacity the country has is Soviet era. It is also falling apart by now and probably will not be restored or replaced. If it is replaced, there will be few people in-country with the technical or management skills to run things. Finally, and I think this was touched upon in the paper, the infrastructure left behind is weighted heavily toward only a couple industries that used to supply the whole Soviet system: in Turkmenistan, it was cotton growing and gas. They pretty much didn’t have the capacity to do much else. I believe Turkmenistan would likely be closer to Afghanistan today if it had not been subsumed by the Russian Empire/Soviet Union.

The problem is that colonialism doesn’t discriminate. It simply takes the weaker and strategic territories. Not sure could have had a Russian Empire/Soviet Union that said “ah, Estonia, you’ll be fine on your own, we won’t ruin you, but Turkmenistan you seriously need some help.” It doesn’t work like that. Colonialism can only be good in retrospect and only for some places.

Sort of like Texas if not for the central planning from Washington run by people like LBJ and his fellow Texas Democrats.

Think Johnson Space center. The efforts to create the academic climate that made putting the supercollider in Texas, a world record scale construction project, a solution to the crash in Texas oil economy with Saudis driving prices way down in the 80s. And the Federal tax policies promoted drill baby drill regulated by the Texas Railroad Commission which got effectively Federal reach until the 70s.

Texas was a major economic force long before State Capitalism. You know there is a school of thought that the Texas economy was held back by oil, that the state long suffered from a form of Dutch Disease. If you look at industrial and agricultural development in the state before 1910, you see a state that was industrializing faster than any southern state, other than Alabama. This even continued as oil became dominant, though much of the state’s manufacturing became much more oil and chemical oriented. Much of the equipment in the early fields was manufactured in Texas and the state has been from the beginning a major producer of oil equipment.

Yes the dams that Rayburn, Dies, and LBJ got built were a result of federal money, but they have always been mostly suppliers of residential, and not industrial power. Houston and Dallas were major cities long before federal New Deal Aid. Yes the state may have been culturally backward and federal support helped with this problem immensely, but to describe the trajectory of Texas as the product of state capitalism is ridiculous.

Good comments. Dams in Texas? There are some, but they are minor compared to West or the East. TVA was created in Tennessee (and elsewhere) for a reason. For example, the largest dam in Texas is (apparently) Mansfield Dam. The associated lake (Lake Travis) is 1/20th the size of Lake Mead. Bigger lakes exist in Texas, but with smaller dams. The power capacity of Mansfield dam is 102 megawatts. Grand Coulee has a capacity of 7,079 megawatts.

In terms of historical support, I would suggest that the building of the Houston Ship Channel had a greater impact on the state.

I think he might be forgetting the incredible wealth transfers out of many of those countries into Russia. That exaggerates the effect of later economic development and minimizes the ability to discover the inefficiencies of planning.

MR has had this behaviour for a while. I wonder if it has something to do with caching – like, the comment counter on the front page is the actual number of comments in the database for that post, but the actual display of comments is from a caching server that runs some amount of time behind the database.

U.S. aid to Germany started in 1948/1949 and ran around $500 million per year for 3 years. Germany’s GDP was already rebounding at the start of the Marshall plan, rising from $143 billion in 1946 to $191 billion in 1948 and $223 billion in 1949 (in 1990 GK dollars). A reasonable guess might be that Marshall plan aid was roughly equal to 1% of GDP for the years in question. France got more aid than Germany and the UK received much more assistance.

True about the Marshall Plan. Most of what I have read dates the wirtschaftwunder to the currency reforms in 1948. West Germany did start with one advantage though — unlike East Germany it didn’t have a large portion of its industrial plant disassembled and sent to the USSR.

Very interesting paper, and it may explain why Islamist movements in the central Asian former Soviet republics have not had much success. OTOH, the matter of quality of statistics/data is a serious one, although one not easily solved.

USSR didn’t have a space program until it was needed for military build up. The US would not have a space program except for military build up. Early on, it was agreed space would not be used for war as a matter of sovereignty – extending air space to the moon and beyond – so Eisenhower invented space for civilian purposes, as did the USSR. NASA was a $10B rationalization for $50B on global destruction, Likewise, the USSR used space exploration as the justification of the superiority of the communist system in a race between communism and capitalism.

Mexico was not devoted to being a superpower, so no need for taxes to pay for the one common reason for central planning to boost economic growth.

I have not seen one person argue against the central planning of all military which takes over a large part of the economy and is funded centrally by taxes.

The bigger the military the higher the tax and spend directed by central planners, the higher the economic growth, the more the investment in all the important things of economic growth, like science and technology, education, public health, the building of transportation infrastructure, the building of the industries to build the infrastructure and means of war.

But to sell those who don’t like war, the tax funded central planning of war is sold as civilian: NASA, ARPA without the D, DOE, nukes to plowshares.

Conservatives are so opposed to the sequester because half the cuts are in the central planning of the economy that conservatives support because they know it grows the economy in their districts: the “defense” spending, which means the “spy on everyone” jack up Virginia’s economy spending. Or maybe Texas, or Alabama, or who knows which redstate Obama is going to punish by crashing their economy by pulling the plug on central planner spending.

You underestimate the volume of Russian made crap throughout the world. I often hold that Mexico doesn’t get enough respect, but even before the revolutions that wrecked both countries, Russia was a major industrial powerhouse, while Mexico has always been a very elaborate mining operation. In 1910 Russia, with the exception of pilot projects and aristocratic consumption, everything was made in Russia, while in Mexico, once you got beyond the crudest commodities it was all imported. A fact that remains pretty much true today.

” It accounts for the relatively disastrous performance of East relative to West Germany, while helping to explain why Russia is in some regards a better place to live than Mexico.”

Can anyone think of any other differences between Russia and Mexico? Is it really that hard? Let’s try a few. The Russian Academy of Science was founded in 1724. It’s Mexican counterpart was founded in 1959. Education had high prestige in Russia before the revolution (and after). Mexico? Russia had (and has) vastly better natural resource endowments (and not just minerals, consider arable land). On the eve of the Revolution Russia had already had large coal, steel, and oil industries. Mexico?

It’s absolutely true that the Soviets invested massively in both physical and human capital. However, ignoring the other huge differences between Mexico and Russia is misleading at best.

Arable land is actually a shorthand for the geography of Russia vs. Mexico. Russia has a temperate climate and adequate rainfall for much of its territory (European Russia). Russia has vast rivers providing a built-in transportation system. Russia’s terrain facilitates building and maintaining roads, railroads, etc. From Moscow to the heart of Europe there are few physical barriers to trade (and marching armies).

By contrast, Mexico was historically cutoff from the centers of the North American economy (not any more). There is an ancient Mexican expression that captures this geographic point rather well.

“Better the desert than the railroads”

Of course, the quip has all manner of other meanings that also explain Mexico’s lack of development compared to Russia.

What’s the data show? Literacy rates in Russia vs. Mexico in 1918 or 1950 or 1980? College graduates per-capita at various ponts in time? I have always found Mexico to be punching below its weight on a education / per-capita GDP chart. In other words, Mexico was historically richer than its education level would have indicated (or less educated at the same level of income).

Those dates are all after the Mexican Revolution. Admittedly, pre-revolution Mexico was the Porfiriato, which had its own issues (and why there was a revolution in the first place), but the ideas of technocracy and industrialization were under full swing then. I’ll admit I don’t have data regarding educational attainment in late 19th century Mexico.

Comparison of Russia to Mexico is strange. Mexico was hardly a case of strong capitalism in the early to mid 20th centuries. There was private property, but the state had nationalized various industries and endorsed a huge labor union in patronage to the controlling party. Liberalization did not occur until after 1986 which is not too far off from the collapse of the USSR. The only thing I see that the USSR did that Mexico did not was insure that everyone received a basic education. Mexico also kept a large semi-feudal land tenure agricultural economy in the south, but this is hardly an example of actual “capitalism” and more in lines to the feudal economy that liberal capitalism was a reaction against.

Furthermore, Mexico never had the advantage of a large number of international spies giving them industrial secrets; never had the ability to remove Central European and Manchurian industrial plant as WWII reparations; and did not kidnap large numbers of German scientists. Perhaps if they did, they would have achieved more like the Soviet Union did.

Perhaps a better comparison would be Mexico versus Cuba. Or between the two Koreas, or Taiwan versus PRC.

Both Koreas had to develop the military capacity for war, but in the South, the US required the war industry offer profit opportunities to US corporations, so the war economy of the south was crony capitalism with sops to the people like education and jobs and consumption in order to get them to support the war economy. Eventually, as by Friedman’s theory, authoritarian rule was undermined by the economic development of a market economy.

But before democracy, it was centrally planned by ruling military government cronies.

“while helping to explain why Russia is in some regards a better place to live than Mexico.”
I would prefer to be an average Mexican than an average Russian. Having visited both countries extensively, the average Mexican appears happier to me than its more educated counterpart in Russia. The Soviet system did tremendous damage to the psyche of Russians that persist until today. They had to live in fear and, more importantly IMO, their faith was erradicated by force. The younger generations were raised without it. For many of us, it is the essence of our being and Russians should have had the right to raise their children within their faith.

If I may be a bit less “clinical” and “dispassionate.” I find this idea of analyzing the “benefits” of central planning in the ways summarized by the authors to be a good example of the madness of scientism.

“Measuring” the benefits of this, and the measurable costs of that.
Followed by a quantitative comparison of more planned and less planned societies.

Estimates are that between at least 40 and 60 million people died in “building socialism” through “planning” in the Soviet Union. Millions sent to “build” infrastructure in the wastelands of Siberia and central Asia in the GULAG system.

There were quotas for rounding people up for execution or exile to the labor camps as “wreckers” and “enemies of the people” delaying the industrialization of the socialist paradise; or as “spies” of the capitalist countries.

To bring “modernization” to Soviet agriculture, scholars such as Robert Conquest have suggested that the evidence points to as many as nine to twelve million killed in the process of forced collectivization of the land in the early 1930s.

We mind as well, as the same time, do a dispassionate cost-benefit analysis of the “scientific gains” from Nazi experiments on people in the concentration camps. Why we are so much ahead in our biological knowledge from that “rough around the edges” research and experimentation!

So, please, give me a break with this “unbiased” and “scientific” analysis on the “gains” for the Russian people (and others) from the central planning system.

And if anyone tries to give the answer that, well, unfortunately, some “bad people” were mixed up with the system, I suggest they read the chapter on ‘Why the Worst Get on Top’ in Hayek’s “The Road to Serfdom,” and reflect on why the same evil and brutality has accompanied virtually all “experiments” with full blown central planning and communism.

To this I would add that even the authors acknowledge that much of the public infrastructure that was built during the planned economies was used to serve the interests of the state, not producers and consumers. Moreover, it is not clear how those societies were successful at improving “human capital.” Weren’t most of the schools just centers for Communist propaganda, and therefore failed to adequately provide skills and knowledge that would be useful in a market economy?

Yep, the Soviets built the highways to support the military just like the Germans built the autobahn.

Eisenhower built the Interstates for defense because central planning for war is never questioned by conservatives.

Wilson nationalized the bankrupt railroads in 1918 for WWI and in the process restored the railroad industry to health for three decades: central planners deciding which rail lines made sense, central planners deciding on what standard locomotives would be, etc solved the problems the market couldn’t.

The WWI experience with aircraft made clear the market was incapable of providing the aircraft the military needed when confronting the Europeans, so central planners laid out the blueprint for how the US air industry would operate: patent pooling or else government confiscation, and regular scheduled air routes, initially subsidized heavily by the Post Office by order of Congress, and government dictated airways across the US which still persist today in large part because the market has not put in every plane the means of free flight – the government is dictating the hardware for free flight in order to finally end the dependence on air routes laid out on the basis of where bonfires could be built to be seen for 50-100 miles to guide planes. But the aircraft industry was needed for war purposes more than civilian because only the rich civilians would be able to afford air flight.

MIT was a center of manufacturing technology especially automation, to get production of war parts increased by an order of magnitude. And there was the central planning of computer systems for the military, first to make artillery tables and then for code breaking. Data processing advanced rapidly to support the census central planners, but for war data processing was needed for all the logistic of war.

And soldiers needed to by educated and healthy to fight a modern war. Able to read manuals to fix machines, able to write reports and calculate inventories and forecast the need for supplies to write the orders to get them where needed.

The market economy in the US did not supply what the military needed in 1812, in 1862, in 1918, in 1940, in 1965, in 1981, in 2001. If the market is so great, why did Reagan call for central planners to build his star wars system.

mulp, I won’t deny that wars have often been catalysts for innovation. But then if you accept this, I would ask why liberals, presumably yourself, are always calling for cuts in defense spending and ending foreign wars? Seems a bit contradictory.

I think this is a gross simplification of the history of the interstate system. I mean, there has always been an element of military justification in highway spending, but to say that the interstates were built entirely by Eisenhower and that it was entirely for defense is like saying that the internet was built by DARPA for defense. There might be some kernel of truth to both claims, but they both ignore the huge contributions of others over a long and complex history.

“Wilson nationalized the bankrupt railroads in 1918 for WWI and in the process restored the railroad industry to health for three decades: central planners deciding which rail lines made sense, central planners deciding on what standard locomotives would be, etc solved the problems the market couldn’t.”

Im no expert on that subject, but wikipedia doesnt describe it that way:

“Weren’t most of the schools just centers for Communist propaganda, and therefore failed to adequately provide skills and knowledge that would be useful in a market economy?”

No, at least not in math and the sciences. As a student I read Soviet math, chemistry, and physics textbooks. The were very, very good and totally non-political. The level of math / science education in the Soviet Union was outstanding.

As for literature, social studies, economics, etc. I have zero data. Might have been mostly state propaganda. Might not have been as well.

But, Peter, Soviet/Russian biological research never recovered from the Lysenkoist episode. Math, physics, and chemistry were/are all world class. Biology, and particularly genetics, is not.

In economics, mathematical economics was high quality, but political economy was largely a Marxist-Leninst joke aside from some old scholars of the German Historical School who managed to survive the purges.

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Seems to me that if you were an educated white Christian European that from the 1870s to 1913 Russia was in most regards a better place to live than Mexico. By 1919 and for the next four to five decades Mexico was in practically all regards a better place to live than Russia. By 1965 there were arguably some advantages to living in Russia if you were poor or working class, but educated people, especially Jews, were still better off in Mexico. Today the gap is narrower for educated people, but the scales for the working class have possibly tipped back to Mexico somewhat. Although, educated people tend to leave Russia, poor people tend to leave Mexico. Make of that what you will.